Jargonomics : Intellectual Property Prices and Marginal Cost

The marginal cost of a good is not usually a relevant factor when crafting intellectual property policy. Marginal costs estimates are based on models of static efficiency, not dynamic efficiency, which is more relevant to policymakers.Profit margins on goods must be high enough to both support investment and exceed the opportunity cost of alternatives. By contrast, marginal cost cannot be used as a guide to pricing goods with high initial production cost and low or declining marginal cost, as is typical for intellectual property products. These sectors should not be treated any differently in the policy world because all industries strive for low marginal cost and only vary in the matter of degree.Four points concerning marginal cost to consider when crafting intellectual property policy:-Prices set above marginal cost are not a sign of undue market power or monopoly due to intellectual property or anything else. -Prices above marginal costs bring new investment and new competitors into the market in question. -Setting prices at marginal cost (for example, in the context of compulsory licensing of music or pharmaceuticals) does not amount to setting the right price; only a market can do that. -Insisting on static inefficiency in the short run reduces investment and undermines dynamic efficiency in the long run